Tax Shift Aims to Steer Chinese to Smaller Cars

By Edward Cody
Washington Post Foreign Service
Friday, March 24, 2006

BEIJING, March 23 -- Battling to control its energy bills, the Chinese government on Thursday announced a sharp tax increase on big cars and a matching reduction for smaller models.

The tax measures, issued by the Finance Ministry and published in the official press, marked the latest step in a so-far fruitless government campaign to persuade increasingly flush Chinese motorists to stop buying gas-guzzling prestige sedans and heavy sport-utility vehicles.

The adjustments are part of a fiscal package that also includes new taxes on luxury goods, including yachts, golf clubs and fancy watches. Although these levies touch only a few of China's 1.3 billion people, they reflect growing unease in the Communist Party over a rapidly widening gap between the newly rich and the millions of poor who have not profited from the last 30 years of economic development.

In the change expected to have the widest impact, the ministry said sales taxes on passenger cars with an engine displacement of more than 2 liters will rise April 1 from 8 percent of the car's value to from 9 percent to 20 percent, depending on engine size. The tax on cars with engines smaller than 1.5 liters will be cut from 5 percent to 3 percent, the ministry added, and the rate for cars between 1.5 and 2 liters, which covers most big-city taxis, will remain at 5 percent.

The new rates seemed designed principally to discourage newly wealthy Chinese from flaunting their riches by driving high-consumption cars, including the large four-wheel-drive vehicles that have become fashionable. At the same time, the tax reduction on smaller cars was seen as an attempt to nudge first-time middle-class buyers toward economy cars rather than passenger vans or luxury sedans.

As the economy booms with more than 9 percent annual growth, such automobile purchases have become a broadly accepted rite of prosperity among well-off professionals, businessmen and senior functionaries. The number of cars on Chinese roads has doubled over the past five years to reach an estimated 17 million, according to the National Statistics Bureau, and the sight of large Mercedes-Benzes, BMWs and Audis vying for space on crowded streets has become commonplace.

Traffic jams and exhaust pollution have become legendary in many cities, particularly Beijing, and China's bill for imported oil has risen dramatically. The government has forecast that oil imports will rise to 190 million tons by the end of the decade, up from 123 million in 2004. Gasoline consumption is a big part of the total. The government's Development Research Center has estimated that cars will consume 138 million tons by 2010.

Despite the rising bill, about 80 of China's large cities have instituted traffic regulations that bar or restrict small cars on major streets, with the official explanation being that they are too slow and hinder traffic. But many Chinese attribute the bans to pride in the country's new wealth and a desire by image-conscious officials to move as far as possible from the putt-putting two-stroke tractors that defined motoring here in an earlier era.

The National Development and Reform Commission, part of Premier Wen Jiabao's government, issued an order in January saying all such restrictions must be lifted by March. But the order has largely gone unheeded -- even in the capital, where Wen lives and works. The tax measures announced Thursday were seen as an attempt by Wen to attack the problem from another direction.

A spokesman for the Beijing city government would not say Thursday whether the restrictions were still in force in the capital, but taxi drivers said they were. The driver of a small car was seen this week getting a ticket on Chang An Avenue, one of the capital's main thoroughfares, and an official Beijing traffic information number carries a recorded message saying small cars must stay off the main streets.

"The city government hasn't changed the rules at all," said Wang Jiyuan, a cabbie who was waiting for a fare in central Beijing.

Under Beijing's rules, the largest avenues have been declared off-limits to cars with engines of less than 1 liter. This has barred the minivans widely used in China as delivery trucks -- called "bread cars" because they are shaped like loaves -- and the small, wheezy sedans once prized for their low gasoline consumption.

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